If you’ve probably heard of the term “debt ratios” but if you haven’t it’s a term lenders use when comparing your gross monthly income with your current minimum monthly credit payments. Such payments include an automobile loan, credit cards and student loans. It also refers to your total monthly mortgage payment as well. Lenders like to see your mortgage payment which includes an amount for property taxes, insurance and any mortgage insurance, be around one-third of your gross monthly income. For total monthly debt, the ideal debt to income ratio is around 40 percent. Lenders refer to these numbers as “33, 40” or whatever your ratios might be. The 33 is the “front” ratio and 40 is the “back” ratio.
Okay, so when you’re getting ready to apply for a mortgage, either to purchase a house or to refinance an existing home loan, you can calculate your own front ratio on your own. How? Take a look at the statements you receive each month. Your creditor will present your current balance, credit limit and minimum monthly payment. Regardless of how much you pay each month, your mortgage company will use the minimum payment. Add up all your minimum payments for a total. Next, compare that amount with your gross monthly income for everyone that will be on the loan application. What’s the result? Too high? Is your front ratio looking more like your back ratio? Your mortgage payment will be the single biggest monthly expense and if your front ratios are too high it’s likely so will your back ratios.
To keep your debt levels in check, see about paying off any existing debt if you’re able. If not, then consider making more than just the minimum monthly payment in order to get your ratios where you need to be. If your gross monthly income is $5,000 per month, one-third of that is $1,650. This is the maximum debt load you should have to keep within the 33 percent number. If it’s not quite there and you’re over, take a look at any accounts that by paying down will have the most impact. Typically, this is a credit card account.
Overall, pay with cash as often as possible and don’t put anything on a credit card you don’t need. Use a debit card to keep a running track of cash outlays and set a budget and stick to it. The main reason people have such a hard time keeping debt levels in check is they never really know exactly where they stand at any time.
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